John Key probably finds it hard to compute that his Government is now on the backfoot. Photo / Otago Daily Times

John Key earned himself a fabulous reputation as one of the "big swinging dicks" of the international foreign exchange business.

But in going toe-to-toe with Rio Tinto over the Tiwai Point smelter electricity negotiations, all the signs are his Government is about to be screwed by a major player with plenty of form in the tough world of international brinkmanship.

Cruel observers of this political game would probably say it's just another example of the "swinging dick to limp dick" syndrome which afflicts too many business people when they enter national politics.

The Key Government has already shown itself a willing player when it comes to talking down and dirty with SkyCity over the "pokies for convention centre" deal which the Deputy Auditor-General frowned on. The deal to keep Sir Peter Jackson's The Hobbit here attracted opprobrium (though not from me).

But this particular market intervention does not cut the mustard.

Key probably finds it hard to compute that his Government is now on the backfoot as it tries to scramble together a short-term subsidy to prop up the energy-hungry smelter for a few more years, all the while as the Treasury floats down 49 per cent of the shares in Meridian Energy (which supplies electricity to the smelter), and other state-owned electricity generators like Mighty River Power and Genesis Energy.

The problem is Key's Cabinet ministers - particularly State-Owned Enterprises Minister Tony Ryall - have become so captive to the Budget forecasts which Finance Minister Bill English wants to make good on when he unveils the next major numbers in Parliament on May 16, that they are prepared to sacrifice the integrity of the State-Owned Enterprises model for short-term gain.

Cabinet ministers are not supposed to bypass an SOE board when it comes to negotiations between the company and its customers.

Yet Ryall - without even a blush - has done just that.

This is a questionable tactic at best. And (in some quarters) would be viewed as bordering on outright market manipulation. A major shareholder who pulled such a stunt in the commercial sector would be seen as operating a very dubious support mechanism to artificially hold up the price of major revenue streams to enable that very same shareholder to realise artificially high gains when it comes to floating down comparable assets.

It should be investigated by market authorities.

The Government will say that the short-term subsidy will give the smelter owners breathing time until the international aluminium price (and forward orders) recover.

But the truth is what the Government is proposing in its secret talks with Rio Tinto (Meridian's board is not part of this play) is merely a transitional taxpayer subsidy to keep the smelter owners in New Zealand until the aluminium price recovers and they can run the asset from their own balance sheet. In fact, Rio Tinto's balance sheet is strong enough to fund that itself - if it chooses.

But the problem for the Key Government is it has been gamed by Rio Tinto.

Late last year, Key believed the Government could call Rio Tinto's bluff. Rio Tinto can't just close the smelter down. It has a take-or-pay agreement for power from Meridian's Manapouri station until 2016. After that - even if it decides to close the plant - current contracts stipulate a wind-down phase of about two and a half years. It also faces remediation costs to put the site back into a good environment condition.

Problem is ministers have become spooked.

If they had strong guts they should simply call Rio Tinto's bluff (as Key originally signalled would be the case).

If the aluminium company walks away the price of electricity will come down (no bad thing) and Meridian will have the potential to market renewable power to attract other energy-hungry international users like data centres instead of a company which just adds to our carbon emissions profile.

It's fair to say that Rio Tinto (forget Pacific Aluminium which owns the smelter as it is just a subsidiary) believes it has the Key Government by the short and curlies as it endeavours to get the New Zealand taxpayer to subsidise its operations at Tiwai Point, instead of either ponying up the running costs itself, or closing the smelter if it is indeed uneconomic for the longer-term.

It's a far cry from late last year, when Key - and his senior ministers - believed they could finesse the Australian headquartered multi-national as it began the softening up process to try to get us taxpayers to subsidise the smelter to continue operations here.

Back then Key was playing the margins. He believed (and this remains true) that Rio Tinto was merely playing games.

The smelter uses around one-seventh of all electricity consumed in New Zealand since it opened in 1972. It's always played hardball. But it's time an New Zealand Government returned serve.

Meridian's board has not been cut into the Government's secret negotiations with Rio Tinto's representatives.

The Meridian directors include some tough players: chairman Chris Moller formerly chaired the NZRU for five years and also chairs NZ Cricket; Mark Cairns runs a tight ship at Port of Tauranga and Jan Dawson, formerly head of KPMG, and Ballantyne's chief executive Mary Devine weren't brought down in the last shower.

Fran O'Sullivan has written a weekly column for the Business Herald since its inception in April 1997. In her early journalistic career she was a political journalist in Wellington and subsequently an investigative journalist who broke many major business stories including the first articles that led to the Winebox Inquiry in both NBR and the Sydney Morning Herald. She has specific expertise in relation to China where she has been a frequent visitor since the late 1990s. She is a former Editor of the National Business Review; has twice been awarded Qantas Journalist of the Year and is a multiple winner of the Westpac Financial Journalism Supreme Award.